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Charter value, Tobin's Q and bank risk during the subprime financial crisis

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  • Jones, Jeffrey S.
  • Miller, Scott A.
  • Yeager, Timothy J.
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    Abstract

    Charter value is important in the banking industry because of its ability to reduce the moral hazard incentives that result from government-provided deposit insurance. Previous research suggests that geographic deregulation in the 1970s and 1980s increased competition and eroded charter values. Yet, a common proxy for charter value, Tobin's Q, increased significantly in the 1990s and beyond even as bank deregulation continued. We show that Tobin's Q is a poor cardinal measure of charter value though it still has merit as an ordinal measure. Our findings suggest that charter value has been declining through time, contributing to the increase in risk-taking that led to the subprime financial crisis.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619510000688
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 372-391

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:372-391

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Charter value Tobin' s Q Core deposits Bank holding companies Subprime financial crisis;

    References

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    1. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    2. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    3. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
    4. Lindenberg, Eric B & Ross, Stephen A, 1981. "Tobin's q Ratio and Industrial Organization," The Journal of Business, University of Chicago Press, vol. 54(1), pages 1-32, January.
    5. Kevin J. Stiroh, 2002. "Diversification in banking: is noninterest income the answer?," Staff Reports 154, Federal Reserve Bank of New York.
    6. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, January.
    7. Grossman, Richard S, 1992. "Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930's," American Economic Review, American Economic Association, vol. 82(4), pages 800-821, September.
    8. Wheelock, David C & Kumbhakar, Subal C, 1995. "Which Banks Choose Deposit Insurance? Evidence of Adverse Selection and Moral Hazard in a Voluntary Insurance System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 186-201, February.
    9. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    10. Fiona Tregenna, 2009. "The fat years: the structure and profitability of the US banking sector in the pre-crisis period," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 609-632, July.
    11. Anthony Saunders & Berry Wilson, 2001. "An Analysis of Bank Charter Value and Its Risk-Constraining Incentives," Journal of Financial Services Research, Springer, vol. 19(2), pages 185-195, April.
    12. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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    Cited by:
    1. Niu, Jijun, 2012. "An empirical analysis of the relation between bank charter value and risk taking," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 298-304.
    2. Pathan, Shams & Faff, Robert, 2013. "Does board structure in banks really affect their performance?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1573-1589.

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